New York, March 28, 2012 -- Moody's Investors Service has assigned provisional ratings (provisional
senior unsecured debt at (P)A3), to Arch Capital Group Ltd.'s
("Arch"; Nasdaq: ACGL) multi-seniority shelf
registration statement that was filed by the company on March 23,
2012. The registration statement includes various classes of debt
and preferred stock issuable by Arch and Arch Capital Group (U.S.)
Inc. (as well as common stock, warrants and share purchase
contracts by Arch). Any issuance by Arch Capital Group (U.S.)
Inc. would be fully and unconditionally guaranteed by Arch.
The shelf registration statement replaced Arch's previous shelf
registration statement filed on March 31, 2009. Moody's currently
rates Arch's principal operating subsidiaries A1 for insurance financial
strength. The outlook for the ratings is stable.
Moody's has also assigned a Baa2(hyb) rating to $325 million
of Series C Non-Cumulative Preferred Shares issued by Arch (the
"Series C Preferred Shares"). The Series C Preferred
Shares are perpetual, non-cumulative and are callable by
Arch after five years. Proceeds from the offering will be used
by Arch to redeem its $200 million of outstanding Series A Non-Cumulative
Preferred Shares and its $125 million of outstanding Series B Non-Cumulative
Preferred Shares.
RATING RATIONALE -- ARCH CAPITAL GROUP
According to Moody's, Arch's ratings reflect the company's
established operating platform and good spread of risk in specialty international
insurance and reinsurance (through its leading subsidiaries located in
Bermuda, the United States and the United Kingdom), its strong
equity capitalization and balance sheet unencumbered by legacy exposures,
its high quality investment portfolio and strong liquidity at the holding
company. Arch has produced strong and consistent profits over the
years and maintains a moderate financial leverage profile (12.9%
at 4Q2011). These strengths are tempered by the underwriting volatility
and pricing uncertainty inherent in many of the company's chosen lines
of business, which include catastrophe-exposed property and
aviation risks and low frequency, high severity casualty-based
exposures.
While Moody's sees little potential for further upward pressure on Arch's
ratings over the medium term, increased geographic and product diversification
and reduced catastrophe risk exposure would augment the company's
credit profile.
Conversely, the following factors could exert downward pressure
on the ratings: adjusted financial leverage above 18% ,
gross underwriting leverage above 3x and a decline in shareholders' equity
of more than 10% over a 12-month period from capital management
actions, underwriting losses and/or investment losses.
RATING RATIONALE -- SERIES C PREFERRED SHARES
Moody's stated that the Baa2(hyb) rating assigned to the Series
C Preferred Shares reflects standard notching (vs. the senior rating)
for non-cumulative preferred shares that lack a mandatory trigger
we consider to be "meaningful".
The security is ratable by Moody's because although it contains
a "variation or exchange" provision, the conditions
under which the security could be varied/exchanged, and the nature
of changes that could be made, are limited in ways that retain important
protections for investors. First, the security may be varied
or exchanged only in response to a tax event or a (Tier 2) capital disqualification
event. Second, in addition to a broad prohibition against
changes that would be less favorable to investors (albeit somewhat weakened
by the lack of third-party affirmation of that determination),
the security specifically prohibits certain changes. Prohibited
changes include any that would a) change the amount, b) change the
dividend payments, c) change the redemption dates, d) alter
the currency, e) reduce the liquidation preference, or f)
lower the ranking.
Under a capital disqualification event, there is a risk that Arch
could tighten the conditions triggering a mandatory dividend suspension
enough for Moody's to judge the trigger as "meaningful",
as would be the case if the trigger were changed to become effective at
a capital ratio materially higher than the Solvency Capital Requirement
level. We believe such a change would be considered less favorable
to investors. Moreover, we consider it unlikely that,
based on current proposals for Tier 2 capital criteria under Solvency
II QIS-5, future Tier 2 capital criteria would include a
mandatory trigger on perpetual non-cumulative preferred securities
that we would judge to be "meaningful". Nonetheless,
in the event that the Series C preferred shares were to be varied to include,
or exchanged for new securities with, a meaningful mandatory dividend
suspension trigger, the rating on the Series C Preferred Shares
would likely be lowered by one notch.
The following provisional ratings have been assigned with a stable outlook:
Arch Capital Group Ltd. - provisional senior unsecured debt
at (P)A3, provisional subordinated debt at (P)Baa1 and provisional
preferred shares at (P)Baa2.
Arch Capital Group (U.S.) Inc. - provisional
guaranteed senior unsecured debt at (P)A3, provisional guaranteed
subordinated debt at (P)Baa1 and provisional guaranteed preferred shares
at (P)Baa2.
The following rating has been assigned with a stable outlook:
Arch Capital Group Ltd. -- Series C Non-Cumulative
Preferred Shares at Baa2(hyb).
Through its operating subsidiaries, Arch writes commercial and specialty
lines of business in the insurance and reinsurance markets primarily through
regional, national and global brokers. During 2011,
Arch reported $2.7 billion of net premiums written and $411
million in net income available to common shareholders. As of December
31, 2011, shareholders' equity was approximately $4.6
billion.
The principal methodology used in this rating was Global Rating Methodology
for Reinsurers published in December 2011. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
Moody's office that has issued a particular Credit Rating is available
on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
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Information sources used to prepare the rating are the following :
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and proprietary Moody's Investors Service information.
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for information on (A) MCO's major shareholders (above 5%) and
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James Eck
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Stanislas Rouyer
Senior Vice President
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's rates Arch Capital Group's multi-seniority shelf registration; assigns Baa2(hyb) rating to Arch's Series C preferred shares
